Tuesday 14 August 2018

What's tax position if I buy mum's home?

Email your questions to lmcbride@independent.ie or write to ‘Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1’. Stock image
Email your questions to lmcbride@independent.ie or write to ‘Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1’. Stock image

Michael Gaffney: Tax expert with KPMG

Q: My mother owns a house in Galway city that is valued at €625,000. This house was left to her by her aunt in 1985. The house has now fallen into disrepair and needs a full refurbishment. As my mother is in her mid-70s, the bank is not willing to give her finance to refurb the property - and I will need to have the house in my name before the bank will give me finance. What is the most tax-efficient way she can pass the house onto me so that myself and my wife can do up the house? We would be able to pay up to €200,000 for the house. Do I have to pay tax on the transfer? Does my mother have to pay tax? I would love to keep the property in the family and hopefully move into it someday with my family. Michael, Galway

Normally Capital Acquisitions Tax (CAT - also known as gift or inheritance tax) is charged at a rate of 33pc of the gift or inheritance. However, there are lifetime tax-free thresholds available with CAT which allow people to inherit a certain amount tax-free over their lifetime, depending on their relationship with the person who gave them the gift or inheritance.

As a child, you can get gifts from your mother of up to €310,000 over your lifetime without triggering CAT. So, assuming you haven't got previous gifts or inheritances from your mother or father, the lifetime tax-free thresholds will reduce the tax bill you would have otherwise faced on the gift or inheritance.

Your wife can only inherit up to €16,250 tax-free over her lifetime from your mother, assuming she hasn't got previous gifts from non-relatives. This is because there is a smaller lifetime tax-free threshold of €16,250 for gifts from non-relatives.

The taxable gift is obviously reduced by any amount paid to the donor, and in this case €200,000 is available.

For tax reasons, it would make sense for you to give to your wife the €200,000 which is available (assuming she doesn't already own that money).

This would allow your wife to pay the €200,000 for a half share of the house while you get the other half share as a gift without paying anything.

Your share of the gift (that is, half of €625,000) is €312,500 and this can be reduced by the lifetime exemption of €310,000 leaving the taxable gift as €2,500.

No tax would be paid on this because the first €3,000 of taxable gifts per annum is exempt.

Your wife has a taxable gift for her half share worth €312,500 - but this would be reduced by the €200,000 which she pays to your mother, as well as the lifetime threshold of €16,250 and the annual gift exemption of €3,000.

After this, your wife's taxable gift is €93,250 and as your wife would pay 33pc tax on this, the tax due would be €31,083. Your mother would have to pay Capital Gains Tax (CGT) on the increase in value of the house since it was acquired in 1985.

In calculating the taxable gain, your mother can increase the market value of the asset at the time she became the owner by multiplying it by approximately 1.7. This is known as indexation relief, and is to compensate for inflation - but only applies up to December 31, 2002.

Any CGT attributable to the 50pc of the house which goes to your wife can be set off as a credit to reduce the €31,083 tax bill payable by your wife.

Should you go ahead with this transfer, make sure to get a good solicitor.

Fair Deal and family home

Q: I'm a widow in my mid-60s and am concerned that I may need nursing home care as I get older. The only money I have is a small private pension - and the State pension. My only asset is the family home and about €10,000 in savings. Should I need nursing home care in the future, it is very likely I would need to sign up to Fair Deal. I would like to keep the family home in the family, however - and pass it onto my son who is an only child. I am keen to transfer the family home into my son's name as soon as possible - so that the family home could not be used to pay for my nursing home fees in the event that I sign up to Fair Deal. What kind of tax bills could I trigger for myself and my son if I transfer the property into his name? In case I never need nursing home care in the future (and therefore never need Fair Deal), what can I do to protect my right to stay in my home after I transfer it into my son's name? I should add that my son is no longer living at home - he has been renting elsewhere for the last four years. Peggy, Dublin 3

The Fair Deal Scheme anticipates that people might divest themselves of assets, so assets disposed of within the five years leading up to an application for Fair Deal are still taken into account in assessing ability to pay.

Also, under current rules, the Fair Deal scheme cannot require any more than 22.5pc (7.5pc a year for a maximum of three years) of the value of the principal private residence to be taken to pay nursing home fees. There is therefore a good chance that your house can stay in the family.

If you transfer your house to your son, you could retain a right to live there for the rest of your life.

This right would have to be valued for the purposes of the Fair Deal scheme, but it would be much less than the value of the house. Bear in mind that transferring the house to your son will give rise to legal costs, stamp duty, and possibly gift tax - depending on the value of the house.

Also bear in mind that the rules of the Fair Deal scheme change from time to time. Indeed, there is no guarantee that the Fair Deal scheme will exist by the time you need nursing home care.

The number of elderly people is increasing rapidly so there may be some other State support mechanism in the future with completely different rules. In this context, it is worth thinking carefully before giving up the value of your house.

CGT bill on inherited house

Q: My father died recently and left me his home. When he died, I had to fill out a CA24 form - to give an account of his estate to Revenue. I filled out the CA24 form about a year ago and am now selling my late father's home. The value of my father's home has increased substantially over the last year. If I sell his house at a higher price than declared on the form CA24, is this increase in price liable for Capital Gains Tax (CGT)? If so, is it possible for me to change the estimated value of the house as stated on the CA24 a year ago to today's value? Seamus, Co Donegal

Yes, any increase in the value of your late father's home since the date of his death is liable to CGT. The current rate is 33pc. I assume you are not living there - but if you were living in your father's home, the 'principal private residence' exemption might apply.

If you think you have undervalued the house when filling out the forms for your father's estate, then you can use a correct valuation to compute the CGT instead.

The best idea is to get an estate agent to give you a formal valuation for the relevant date.

If the correct valuation is significantly higher than the earlier valuation, there could be some knock-on implications.

For instance, if you were subject to inheritance tax, then the increased valuation would mean you may have to pay more inheritance tax - with interest and penalties for late payment.

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